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The do’s and don’ts when talking to representatives of Venture Capital Funds New concepts for Venture Capital backed companies“ Nov 28th, 2013 Dr. Axel Polack General Partner TVM Capital Confidential Questions Do you think about creating a biotech company? How are these companies created and financed? How do they operate? Investment strategies in Life sciences (LS) from an investor„s view point? How do you address a VC company for financing? 2 Confidential Agenda TVM Capital Venture Capital The ecosystem: pharma – biotech finance Investment strategies in LS Introduction to the “Project focused company” (PFC) model 3 Confidential TVM Capital – 30 years in the Business ... today a global player in life science and healthcare investments TVM Capital History and Track Record A life science and healthcare investment firm with global reach Life science VC with offices in Montreal (HQ), Munich and in Dubai (HQ; healthcare PE for emerging markets activities) Numerous awards, including Red Herring Top VC list worldwide TVM Capital founded in Germany by Siemens AG in 1983 From early generalist focus in the 1980s to highly focused investment strategy in IT and life science (since early 1990s), healthcare PE in emerging markets added in 2010, from 2013 onwards firm is solely focused on life science and healthcare Life Science • First LS deal: Qiagen (50x multiple on investment) • Total of $1.8 bn raised in seven fund generations, of which US$1.2bn for LS • More than 120 LS venture and growth investments, 87 total exits • 43 IPOs on NASDAQ, London, Frankfurt, Zurich and Vienna Exchanges, 25 significant M&A transactions • Life Science VC: Investing from 7th fund generation out of Montreal and Munich, 8 investment professionals, 30 portfolio companies, 30+ advisors • Unrivalled deal flow; about 650 deals per year reviewed Source: TVM Capital 4 Confidential Agenda Venture Capital The ecosystem: pharma – biotech finance Investment strategies in LS Introduction to the “Project focused company” (PFC) model 5 Confidential VC fundamentals: how to start? How to start a (biotech) company? • Business idea + intellectual property + management and work force, + money • Business model dictates financing needs: – service company: less € – mixed models: €€ – development company: €€€€ • Sources of capital: – – – – Shareholders: Founders + investors Board C- level executives VPs Employees savings Business angels Subsidies from government or EU Corporate partners – Venture capital 6 Confidential Fundamentals of the VC business < 5 Y. Company with commercially viable technology or drug discovery project Company revenues +/a „derisked“ development candidate Holding period + investment E X I T Public market Big Pharma Biotech 6 x • • Investment amount: 5 – 15 M€ No of investments: 10 - 30 VC company Probability of success VC investor (LP) 7 Confidential Business model of VC: revenue expectations 350 If a 3 x on the fund level is expected: 300 250 Minimum three Winners (> 5X) needed to balance non-performers and losses M 200 € 150 Invest 10x 10Me in 10 companies 100 50 0 investment Gain from the investments 8 Confidential Example of an „ideal“ VC investment in „biotech“ Myogen 33x 9 Confidential Benchmarking: „returns of >230 VC funds“ reported by US LPs Keep in mind: • This is one set of data • There is no claim for completeness! • Received + remaining / committed = incomplete data set Source: http://www.sib.wa.gov/financial/pdfs/quarterly/ir093008.pdf; Calpers; SERS; 10 Confidential Fundraising by VC funds: stabilized! Fundraising by VC funds (NVCA data) 300 40000,0 Number of Funds ($M) 250 35000,0 200 25000,0 150 20000,0 $M Number of funds 30000,0 15000,0 100 10000,0 50 5000,0 0 0,0 year / quarter Source: NVCA (USA) 11 Confidential Markets out of Sync: EU versus US IPOs European biotechnology IPOs by year Number of IPOs by year Pre-crisis Post-crisis Source: Ernst & Young, Capital IQ, Biocentury, Medtrack and Venture Source. 2013 data from Elsevier Business Intelligence. TVM„s IPOs in 2013 • Enanta • Bluebird Bio European biotechnology IPOs by year US biotechnology IPOs by year US biotechnology IPOs by year Source: Ernst & Young, Capital IQ, Biocentury, Medtrack and Venture Source, Elsevier Business Intelligence. 2013 figures correspond to data available until October 31st. 12 Confidential Agenda The ecosystem: pharma – biotech finance Investment strategies in LS Introduction to the “Project focused company” (PFC) model 13 Confidential Pharma Sales: Driven by External Product Sourcing … more than 50% expected to come from young biotech companies Combined global sales for the top 50 pharmaceutical companies Source of products: today 700 Prescription pharma sales ($bn) 600 Co-development In-licensed 500 >50% 400 Acquired through M&A 300 200 Internally generated 100 0 03 04 05 Internal 06 M&A 07 08 In-licensed 09 10 Co-developed 11f 12f 13f Acquired product 14f 15f Other external f = Datamonitor forecast Source: Datamonitor, PharmaVitae Explorer, May 2012; company-reported information 16f Pharma companies will grow only through aggressive M&A and inlicensing strategies! 14 Confidential Situation analysis – 2013 The fundamentals have not changed: Our Customer Big Pharma aggressively looks for innovation, while o facing the „three-headed monster” of patent expiries, insufficient internal R&D productivity and increasing difficult political and regulatory environment o getting involved early through options: early-stage option deals shift risk onto biotechs but also give access to non-dilutive capital and a clear exit perspective. o Preferring license deals instead of acquisitions Our Supplier Academia o continues to produce highly innovative science waiting to be translated o recognizes the need to take their innovation one step further to ensure successful tech transfer Venture Capital o has not delivered (yet) as an industry according to the expectations raised 10 years ago o has to re-focus and adapt to the changing environment o the recent IPO window might help to change this! New business and financing models are needed ! Source: TVM Capital 15 Confidential Research Spending Per New Drug Number of drugs approved 5 10 8 11 14 R&D Spending Per Drug ($Mil) 11,790.93 8,170.81 7,909.26 7,803.77 7,727.03 Total R&D Spending 1997-2011 ($Mil) 58,955 81,708 63,274 85,841 108,178 Johnson & Johnson Eli Lilly & Co. 15 11 5,885.65 4,577.04 88,285 50,347 Abbott Laboratories Merck & Co Inc 8 16 4,496.21 4,209.99 35,970 67,360 Bristol-Myers Squibb 11 4,152.26 45,675 Novartis AG Amgen Inc. 21 9 3,983.13 3,692.14 83,646 33,229 Company AstraZeneca GlaxoSmithKline Sanofi Roche Holding AG Pfizer Inc. Sources: InnoThink Center For Research In Biomedical Innovation; Thomson Reuters Fundamentals via FactSet Research Systems from Forbes Magazine 2_2012 16 Confidential Externalization has become the mainstay of R&D Proportion (%) of drug candidates in clinical development that are externally-sourced, 2007 vs. 2011 100 Externalization of clinical pipeline (%) 90 80% 80 70 65% 59% 60 50% 50 44% 40 30 21% 17% 20 9% 10 0 Roche AstraZeneca 2007 2011 17 Source: Datamonitor, PharmaVitae Explorer, May 2012; company-reported information Pfizer Sanofi Confidential Agenda Investment strategies in LS - Drug discovery process - Business models to finance this process - Introduction to the “Project focused company” (PFC) model 18 Confidential Time and cost of the different stages of drug discovery and development Target to hit Science Duration of phase (a) Time (y) Hit to lead Lead Optim. Preclinical Stage Preclin PhI Clinical Stage Cost of phase M ($) Source: Paul et al. Nature Reviews 9: 203 II III S Market 14 Y 263 M$ > 90% of total cost! 19 19 Confidential R & D productivity: 24 programs have to be started in order to get one product to the market 160 30 140 Cost M($) 25 No. 120 20 100 m ($) 80 15 n 60 10 40 5 20 0 0 Target to hit Hit ot lead Lead opt. Preclin. PhI PhII PhIII Submission The blue squares indicate the number of programs per stage and The grey bars the average cost per program per stage. Source: Paul et al. Nature Reviews 9: 203 20 Confidential Agenda Investment strategies in LS - Drug discovery process - Business models to finance this process - Introduction to the “Project focused company” (PFC) model 21 Confidential VC backed business models Platforms Project focused Companies (PFCs)! • • • • • Expensive • „brick and mortar“ • If successful Incredible profitable Small, fast Lean and mean and virtual Low investment High multiple! Products: development candidates, medtech, diagnostic, technologies, lab supply, …. 22 Confidential Platform Technologies (“early stage”) Definition • Disruptive, highly IP protected technology that allows the development of multiple product opportunities • Full-fledged company with management team & facility • Minimal outsourcing • Strong investor syndicates with „deep pockets‟ to ensure maturation of platform as well as critical PoC. Success Factors • Strong business development resulting in multiple partnerships which facilitate stepwise validation and application of the concept • Balance between in house proprietary projects and partnered programs • Exit: IPO or trade sale Examples from the TVM portfolio • Direvo, Sirna, Sirtris, Intercell, Coley, Bluebird Bio, Enanta Source • Academia and biotechnology visionaries 23 Confidential Potential for optimisation: where and when to play? Target to hit Science Duration of phase (a) Time (y) Hit to lead Lead Optim. Preclinical Stage 5 years Difficult Value creation (except…!) Feedback from LPs: Investment periods are too long!! Source: Paul et al. Nature Reviews 9: 203 Preclin PhI II Clinical Stage III S Market 14 Y 5 years „too much cost“! Ideal space to be! Less cost, maximal value creation! 24 Confidential Project focused companies (PFCs): a new model? Science Target to hit Hit to lead Lead Optim. Preclin PhI II III S Market FIBPCO, e.g. Genentech or Genzyme Academia Public Markets VC financed THE NEW WAY: Pharma PFCs! Academia Source: TVM Capital - Exit through acquisition by the originator! One investor (max 2) One asset Virtual set up: externalized R&D Focus on No-go-decision points! FIBPCO: fully integrated biopharmaceutical company 25 25 Confidential Take home messages “do’s and don’ts” •Megatrends – Pharma needs products from the biotech industry – Pipelines are increasingly externalized – The investor universe is changing: VC – Pharma partnerships, corporate VC, family offices looking for direct investments – IPOs: possible in the US, not (yet?) in Europe. •Funding of high growth / high tech companies at the premarketing stage: – Less money for start up companies than in the past – Why: mediocre returns, mediocre performance by the VC industry – blocked IPO path (EU!) •Consequences for the entrepreneurs? Do„s: – Find out what the VC you are addressing is interested in! – Listen! (VCs, Pharma, experts, …) – Tune the business model to lower capital intensity! – Stay longer within universities, Partner early; Use all subsidies – Be exit minded from the beginning Don‟ts: – burn your business model too early! – Bet only on success (attrition hits all!!) – Empire building 26 Thank you for your attention www.tvm-capital.com